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Your IRA—The Most Expensive Inheritance
IRAs have become so commonplace in America over the last few decades that almost every working person in America has an IRA. With the rapid increases in the stock market during the 1980s and 1990s, IRAs have had the opportunity for dramatic growth in value. In fact, the values of many IRAs are beginning to compete with the family home as the most valuable asset people own.

IRAs may be commonplace and growing in value but, unfortunately, they are the last of your assets you want your family to inherit. Why? IRAs are more heavily taxed than many other assets you may leave to your heirs. Since the dollars going in to fund IRAs were normally never subject to income tax, these accounts are full of untaxed dollars. While the IRS normally collects the deferred taxes from the IRA owner throughout retirement, when the retirement account is left to heirs, they will be subject to pay the income taxes.

To illustrate, let’s say you own an IRA account worth $500,000 and you name your daughter as your beneficiary. When she inherits your IRA account, she will have to report all $500,000 as ordinary income and pay the necessary taxes. If your daughter is currently in a 28 percent income tax bracket, your $500,000 IRA is worth only $360,000 after she pays the income taxes:

IRA value	$500,000	$500,000
Multiplied by income tax rate (28%)	x .28
Income taxes due	$140,000	(140,000)
Net for daughter		$360,000

A Better Alternative for Heirs
When you are planning your estate, you might consider leaving other assets to your loved ones and leaving the IRA to the American Red Cross. By naming a tax-exempt nonprofit organization like ours as the IRA beneficiary, the income taxes are eliminated. We will receive all $500,000 without any income taxes being assessed against your estate, your heirs or the Red Cross. As an alternative inheritance for your loved ones, consider leaving a capital asset such as real estate to your family instead of your IRA. Let’s assume you have real estate you purchased 10 years ago for $200,000, and now the land is worth $500,000. If you leave the real estate (or other capital asset) to your daughter, she will inherit the asset with a cost basis equal to its current fair market value. This is important to your daughter because if she then decides to sell the land for $500,000, she will have no tax consequences whatsoever. Since the land’s value is $500,000 and her cost basis is $500,000, your daughter doesn’t realize any income if she sells it. Accordingly, from an income tax perspective, capital assets make a much better inheritance than IRA accounts.

For more information about this and other charitable gift planning options, contact Marlo Saindon at 410-624-2034 or email her at msaindon@arc-cmc.org.

By Johni Hays
© The Stelter Company
The information in this publication is not intended as legal advice. For legal advice, please consult an attorney. Figures cited in examples are based on current rates at the time of printing and are subject to change. References to estate and income tax include federal taxes only; individual state taxes may further impact results.